McGrath indicates changes to tax bands but says budget will be 'prudent'

Minister for Finance, Michael McGrath TD during The National Economic Dialogue at Dublin Castle,, Dublin. Picture: Gareth Chaney/ Collins Photos

Finance Minister Michael McGrath has said the forthcoming budget will be “prudent” but indicated changes to the tax bands again.

Mr McGrath was speaking ahead of the National Economic Dialogue and said the Government is undertaking a review of the personal taxation code which will involve developing a new roadmap for the future of personal taxation in Ireland. 

It is currently out for public consultation, and he said one specific question relates to the possibility of a third or intermediate rate. Taoiseach Leo Varadkar had previously looked for a 30% tax band before last year’s budget.

He said no policy decision has been made as to whether or not the State will introduce such a rate.

Mr McGrath said a key contrast across different parts of the economy is the labour shortage even though unemployment is at an all-time low at 4%.

“That said, if you do not make any changes to your taxation system, if you remain static at a time of rising incomes, then in effect it represents an increase in the burden of taxation through the back door.

“And so we have a Programme for Government commitment in relation to the indexation of credits and the band and Mr Donohoe is in a position to honour that in the last number of budgets, and I expect given the strong position in our finances, that is a commitment that we will again be able to honour in the forthcoming budget,” he added.

When asked about changes in USC, Mr McGrath said no decisions have been made yet, but any changes will involve alleviating the burden for both low- and middle-income workers.

On the State’s projected €65bn surplus by 2026, Mr McGrath said it was important to put into context the amount of windfall corporation tax receipts that the State expects to collect this year is greater than the projected surplus.

“So actually, when you take out the windfall receipts this year, we don't have a surplus.

“So, what we have said is we absolutely will not use windfall receipts to make recurring commitments either on the expenditure or the taxation side.

“We still will have a certain amount of headroom because of the strength of the finances,” he said.

The headline position and public finances is “particularly strong” but the government is “acutely conscious of the underlying vulnerabilities and the fact that about half of our corporation tax receipts are deemed to be windfall in nature, it does open up risks, and that's why we need to be careful about the choices that we make,” Minister McGrath added.

He said the budget will focus on continuing to provide homes for people, protecting living standards which will “evolve decisions around taxation and welfare to reduce costs for families.” As well as investing in public services and infrastructure and providing for future generations and climate transition.

“So it's trying to strike the right balance between providing an appropriate level of support to our society and our economy, while at the same time, not stoking inflation any further and it's a difficult balance to strike,” he told reporters at Dublin Castle.

Public Expenditure Minister Paschal Donohoe said the government is already planning to increase capital investment next year, a decision made in the National Development Plan (NDP) with capital investment at over €800m nxt year.

He said Government is aware of the challenges facing households, but it was important that “Ireland doesn't find itself caught out again, for the second time in a generation” when it comes to spending.

Mr Donohoe said he was not aware of three junior ministers’ proposing a budget tax cut of €1,000 for middle income workers which appeared in a newspaper and caused frustration within the Coalition.